Cross-price elasticity of demand is a measure of the responsiveness of demand for one product to changes in the price of another product. It quantifies the percentage change in quantity demanded of one product resulting from a one percent change in the price of a related product. This economic concept is fundamental to understanding how products interact within markets and how price changes ripple through interconnected product systems.
The cross-price elasticity value indicates the nature and strength of the relationship between two products. When the elasticity is positive, the products are substitutes, meaning that an increase in the price of one product leads to increased demand for the other as consumers switch to the relatively cheaper alternative. For example, if the price of butter rises, demand for margarine typically increases. Conversely, when the elasticity is negative, the products are complements, meaning they are consumed together and an increase in the price of one reduces demand for both. For instance, higher petrol prices typically reduce demand for large vehicles.
In Life Cycle Assessment, particularly in consequential modelling approaches, cross-price elasticity of demand is essential for identifying which activities will change in response to a change in demand for a functional unit. Products with high positive cross-price elasticity are strong substitutes and are likely to be displaced or replace each other in response to market changes. Understanding these substitution relationships helps determine the appropriate system boundaries and which marginal or constrained activities should be included in the product system model.
The magnitude of the elasticity coefficient provides insight into market dynamics. Values close to zero indicate weak relationships between products, whilst large absolute values suggest strong substitution or complementary relationships. This information guides decisions about system expansion and helps identify the consequential effects of changes in product demand throughout interconnected supply chains.
